Higher exports and investment push first-half growth in all EBRD countries bar two

EBRD flies the flags at its 2017 AGM in Nicosia, Cyprus. A great many of the economies it is invested in have found new wind this year.

By bne IntelliNewsNovember 7, 2017

Higher exports and rising levels of investment on the back of improving commodity prices have prompted the European Bank for Reconstruction and Development (EBRD) to significantly increase its forecasts for economic growth in Emerging Europe. The bank made its case for the revised forecasting in its latest Regional Economic Prospects report released on November 6 .

Countries across the entire EBRD region, with two exceptions, are enjoying broad-based growth and rising income levels. Several countries where the development bank is active are also experiencing record low unemployment. The negatives in the picture are minimal and are mainly caused by economies running up against structural constraints. Rising inflation is, however, a growing concern in some locations.

Average growth across the EBRD region will be 3.3% this year, the development bank forecast. That equates to a rise of 0.9 percentage points over the previous estimate from the bank that was issued in May at the time of the bank’s annual meeting. Growth in 2016 only reached 1.9%.

The EBRD tracks the economies of 37 emerging countries, where it finances projects and supports reforms that promote sustainable and environmentally-friendly market economies.

The growth is mixed with Central Europe being the star performer – Czechia and Romania are the outstanding examples, but even the laggard Eastern Europe is seeing many countries like Russia and Belarus put in better than expected results. All economies in the EBRD space, except Azerbaijan and FYR Macedonia, saw positive growth in the first half of the year.

Several countries, notably Romania and Turkey, are enjoying growth rates comparable to the pre-financial crisis levels of the mid-2000s.

The EBRD’s chief economist, Sergei Guriev, said: “The broad-based recovery is a very welcome development. It also creates a window of opportunity to carry out reforms that will ensure the sustainability of the stronger growth rates over the longer term.”

Unfortunately, it is usually exactly the time when it becomes easier to make reforms that governments feel the least need to make them. While the economics of most of the CEE countries have improved, the politics in many of the same countries have gotten worse. Romania, Czechia Ukraine and Russia are all cooling on the idea of putting deep structural reforms in place and the rise of nationalist politics in regions like Southeast Europe are distracting politicians, who have in many cases preferred to push illiberal agendas. Poland, Belarus, Hungary and more recently Romania and Czechia have all seen large anti-establishment parties or radicals returned in elections in the past few months. Czechia is the latest example, with the ascendance of the Ano movement which won with a landslide in the general election.

Growth across the region is expected to continue into 2018, but at a slightly more moderate pace of 3.0%, the EBRD said. Despite the recent acceleration in economic output, the EBRD expects average growth in to remain slightly below that of other comparable emerging markets.

The bank also offered a cautionary note in saying that despite the good news, the ongoing growth story remains subject to many risks, including geopolitical tensions, persistent security threats, the growing appeal of populist anti-globalisation policies in advanced economies and a high degree of concentration in the sources of global growth.

Inflation is largely on track to meet central bank targets and in Russia’s case has already long passed the 4% the Central Bank of Russia (CBR) was aiming for; in November inflation fell to a record 2.7%. However, inflation is a problem elsewhere. In the Baltics, Azerbaijan, Egypt, Turkey and Ukraine inflation rates are in the double digits, reflecting earlier depreciations of the respective currencies. Similarly, inflation is expected to rise in Uzbekistan (a reforming country the EBRD is returning to after a long absence) where the Central Bank raised its policy rate by five percentage points following an exchange rate liberalisation.

In about two-thirds of the countries where the EBRD is present, the ratios of non-performing loans (NPLs) peaked in the double digits after the 2008-09 global financial crisis. In half of the economies, the NPL ratios peaked at levels close to or above 20%. In most countries, NPL ratios continued rising for several years after the crisis before peaking and starting to decline. A few exceptions include the Baltic States where NPLs peaked early and by now have declined to levels around or below 5%. In contrast, in several economies in Eastern Europe and the Caucasus and Central Asia, NPL ratios are yet to start declining. The declines in NPL ratios from their peaks have on average been modest and NPL levels remain elevated across much of the EBRD map.

Growth is expected to moderate somewhat in 2018, to 3%, in line with views of the medium-term growth potential of the region’s economies and reflecting a number of country-specific factors. Still, even this forecast represents an upward revision of 0.2 percentage points on the May forecast. Notwithstanding this acceleration, the average growth in the region is expected to remain slightly below that of emerging markets elsewhere with comparable per capita incomes.

Eastern Europe
While the economies of Central Europe are reaping the benefits of over two decades of reforms and institution building to reach a critical mass, those of Eastern Europe are doing less well, stymied as they are by the need to make deep structural reforms.

Russia remains an “investment node” for most of the region and especially for the countries to the south and east of it. Russia’s fate has a direct impact on remittances sent home by migrant workers and hence the economies of some of the smaller and poorer countries.

Remittances from Russia to Central Asia, Moldova and the Caucasus stabilised in US dollar terms towards end-2016 as the Russian economy returned to growth and the ruble appreciated in line with oil prices. Remittances rebounded by 21% y/y in the first half of 2017 but remained around 50% of the value recorded four years earlier. In local currency terms, remittances are only 9 percentage points below their peak levels of 2013 reflecting cumulative depreciations in recipient countries in recent years.

Russia is the largest of the EBRD countries and its gathering economic recovery, though restrained, has had a spillover effect on its neighbours, most noticeably in Belarus.

“Russia has now pulled out of recession after a cumulative contraction of 3% over the last two years. Russia is expected to see GDP growth of 1.8 and 1.7% in 2017 and 2018, respectively,” the development bank predicted, giving a forecast that is below those of some of the other International Financial Institutions (IFIs) and local investment banks.

“The increase in the oil price – compared with 2016 – has been a positive factor for Russia, and also for other commodity exporters and countries in Central Asia and Eastern Europe and the Caucasus that rely on Russia for remittance flows or as a destination for their exports,” the EBRD said. The gap in growth rates between the east and west of the EBRD region was now expected to narrow further, it added.

Central Europe
After a slowdown in 2016 linked to lower investment levels, growth in Central Europe and the Baltic states is expected to accelerate to close to 4% in 2017, before moderating to around 3.5% in 2018, the EBRD report found.

Growth in Central Europe has been so fast that several countries are starting to run up against structural constraints, with rising wage costs and tightening labour markets being the most significant amongst them. Wages have grown at such a quick rate that some international investors are beginning to talk about going home as the competitive advantages these countries used to offer are being eaten away and unions are becoming more demanding when it comes to workers' rights and privileges. At the same time the appeal of the lower cost Southern European countries is increasing, but the low levels of productivity and poor infrastructure mean investors are not ready to make the switch as yet.

In Poland, where growth is seen rising to 4.1% this year, the pace will slow to 3.4% as the one-off impact of increased social payments fades. The near-term economic outlook has improved in Hungary on the back of cuts in the rates of corporate income tax and social security contributions as well as increased minimum wages. And labour shortages and the rising cost of labour in Czechia and Slovakia will also undermine growth in these countries in the medium term. All these nations are reaching a tipping point where they will have to reinvest themselves, ditching the low-cost, export-orientated models they have followed so far.

Southeastern Europe
In southeastern Europe, average growth is also expected to accelerate, reaching 3.6% in 2017 before moderating to 3.3% in 2018. The Greek economy has returned to growth in the first half of the year amid progress in reforms and rising confidence.

Growth in Eastern Europe and the Caucasus as a whole is expected to pick up from near-zero to close to 1.5% in 2017 as headwinds from low commodity prices and the earlier recession in Russia subside, although Azerbaijan’s economy is projected to remain in recession. A gradual recovery in the region is set to continue in 2018.

Growth in Turkey is projected to accelerate to 5.1% in 2017 on the back of government stimuli before slowing to 3.5% in 2018 as the fiscal impact wears off.

Economies in the southern and eastern Mediterranean (SEMED) region are expected to show growth of 3.8% in 2017 and 4% in 2018, supported by reform implementation and a continued recovery in the tourism sector, as well as export rebounds in Egypt and Jordan.

Morocco is the only country in the SEMED region that is expected to see a slowdown in growth during 2018, as the base effect from the agricultural rebound in 2017 (after a very poor 2016) is removed.

Real GDP Growth (In %; EBRD forecasts as of 7 Nov 2017)

Actual

Actual

Current forecast

Current forecast

Change in forecast since May 2017

Change in forecast since May 2017

2015

2016

2017

2018

2017

2018

EBRD Region

1.3

1.9

3.3

3

0.9

0.2

Central Europe and the Baltic states

3.5

2.8

3.9

3.4

0.8

0.3

Croatia

2.3

3

2.9

2.6

0

0

Estonia

1.7

2.1

3.7

3.4

1.3

0.7

Hungary

3.4

2.2

3.8

3.4

0.8

0.4

Latvia

2.8

2.1

4.7

4.1

1.6

0.9

Lithuania

2

2.3

3.6

3.5

0.7

0.5

Poland

3.8

2.9

4.1

3.4

0.9

0.2

Slovak Republic

3.9

3.3

3.3

3.5

0.1

0

Slovenia

2.3

3.1

4

2.9

1.5

0.7

South-eastern Europe

2.4

2.9

3.6

3.3

0.5

0.3

Albania

2.2

3.4

3.7

3.7

0.2

0

Bosnia and Herzegovina

3.1

3.2

2.5

3

0

0

Bulgaria

3.6

3.9

3.5

3.2

0.3

0.2

Cyprus

2

3

3.5

2.5

1

0.3

FYR Macedonia

3.8

2.4

1.5

2.5

-0.9

-0.5

Greece

-0.3

-0.2

2

2.2

0

0

Kosovo

4

3.4

3.7

3.5

0.2

0

Montenegro

3.4

2.9

3.7

3.3

0.7

0

Romania

4

4.6

5.3

4.2

1.3

0.7

Serbia

0.8

2.8

1.8

2.9

-1.1

-0.1

Eastern Europe and the Caucasus

-4.8

0.1

1.6

2.7

0.5

0.2

Armenia

3.2

0.2

3.5

3.5

1

0.5

Azerbaijan

1.1

-3.1

-0.5

2

0

0

Belarus

-3.8

-2.6

1.5

2

2

1

Georgia

2.9

2.7

4.5

4.5

0.6

0.3

Moldova

-0.4

4.3

3

3.5

0

0

Ukraine

-9.8

2.3

2

3

0

0

Turkey

6.1

3.2

5.1

3.5

2.5

0.5

Russia

-2.8

-0.2

1.8

1.7

0.6

0.3

Central Asia

3.7

3.6

4.5

4.4

0.7

-0.1

Kazakhstan

1.2

1.1

3.8

3.5

1.4

0

Kyrgyz Republic

3.9

3.8

4.4

4.2

0.5

0.1

Mongolia

2.4

1

2.6

3

1.2

0.2

Tajikistan

6

6.9

6.5

5

2.7

1

Turkmenistan

6.5

6.2

5.7

5.1

0

-0.9

Uzbekistan

8

7.8

5.4

6.2

-0.8

-0.3

Southern and Eastern Mediterranean

3.9

3.3

3.8

4

0.1

-0.1

Egypt

4.4

4.3

4.1

4.5

0.3

0

Jordan

2.4

2

2.3

2.5

0

0

Lebanon

0.8

1

2.3

2.5

Morocco

4.6

1.2

4.2

3.5

0

-0.3

Tunisia

1.1

1

2.2

2.7

0

0

Average "East": EEC, CA, Russia

-2.1

0.4

2.2

2.3

0.6

0.2

Average "West": CEB, SEE, SEMED, Turkey

4.2

3.1

4.2

3.6

1.1

0.2

1 All averages use weights corresponding to countries' nominal GDP values in US dollars at PPP.

2 EBRD figures and forecast for Egypt's real GDP reflect the fiscal year, which runs from July to June.

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